Dubai slides into debt trap, rattles world

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MUMBAI: Markets around the world including India found themselves lashed on Thursday by fears of fresh financial trouble, this time with its epicentre near home in Dubai, threatening to derail an incipient global recovery and holding huge ramifications for India.

Dubai's attempts to reschedule its debt has cast a shadow on a world only just emerging from the worst economic crisis since the 1930s, knocking markets from Sydney to Sao Paulo.

For India, which has tens of thousands of its citizens living and working in the emirate, the concerns are more direct: thousands of its expats staring at job losses and the economy, sharply reduced trade.

India, which gets nearly a quarter of the remittances from the United Arab Emirates and has lakhs of labourers working in the region, could be worse off than most other nations if the crisis escalates into a full-blown one like the Russian or Argentinean crises of the past. India's exports to the UAE stood at $23.92 billion in FY09.

"If they are unable to send a positive message to their investors, it will impact not only NRI remittances, but will also see a lot of NRIs coming back," said CJ George, managing director at Geojit BNP Paribas, which has operations in the Middle East. "It is very likely that we may see one more leg of job losses in Dubai. The only consolation for the region is that Abu Dhabi is booming."

Indian shares and the rupee fell in sync with other global markets where investors are fleeing for safety after Dubai World, the government investment company with $59 billion of liabilities, sought to delay repayment on much of its debt. Investors believe that there could be more troublespots in emerging markets after Vietnam devalued its currency and raised rates.

The Bombay Stock Exchange's Sensex fell 2% to 16854.95, and the rupee fell 24 paisa to 46.55 against the dollar. The MSCI Emerging Markets Index lost 1.4%.

Most European indices were about 2% lower after Asia tumbled. The Shanghai Composite Index slumped 3.6%, its biggest drop since August, and Brazil's Bovespa Index slipped 1.1%. U.S. markets were closed for the Thanksgiving holiday.

Credit-default swaps tied to debt sold by Dubai rose as much as 131 basis points to 571, Bloomberg News reported.

"Dubai isn't doing risk appetite any favours at all and the markets remain in a vulnerable state of mind," said Russell Jones, head of fixed-income and currency research in London at RBC Capital Markets. "We're still in an environment where we're vulnerable to financial shocks of any sort and this is one of those."

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent, should a borrower fail to adhere to its debt agreements.

Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world's steepest property slump in the global recession. Home prices fell 50% from their 2008 peak, according to Deutsche Bank.

Banks around the world have written off more than $1.7 trillion as the credit crisis trashed the value of their assets.

Dubai World's lenders are said to include Credit Suisse Group, HSBC Holdings, Barclays, Lloyds Banking Group and Royal Bank of Scotland Group, all of which saw their shares fall.

"This reminds us that there is still risk out there and things are not recovering that quickly," said Andrew Holland, CEO, Ambit Capital. "It takes the shine out of the risk appetite. It could potentially change the way people were beginning to think."